Highlights of the Revised Economic Capital Framework of the Reserve Bank of India approved by the Central Board

The Reserve Bank of India (RBI) has announced a revised Economic Capital Framework (ECF), following a review approved by the Central Board at its 605th meeting held on May 15, 2025. This update is part of a periodic review recommended by the Bimal Jalan-led Expert Committee, which originally shaped the current ECF adopted in August 2019.

Why the Framework Was Reviewed

As per the 2019 recommendation, the ECF is to be reviewed every five years. The internal review conducted by RBI considered:

• Experience from implementing the existing framework,
• Changing economic conditions,
• Shifts in RBI’s asset profile, and
• Lessons from recent global and domestic financial developments.

The Central Board observed that the existing ECF had effectively ensured RBI’s financial resilience and enabled consistent surplus transfers to the Government. Thus, the core structure of the framework remains intact, but select updates have been made to address emerging financial risks and to give more flexibility in year-on-year decision-making.

Key Changes in the Revised Economic Capital Framework

1. Market Risk Provisions

• Expanded Calculation Scope: Market risk buffer now includes both on-balance sheet and off-balance sheet assets.
• Wider Currency Coverage: Investments in foreign currency assets, including minor currencies, will now be factored in for risk provisioning.

2. Credit and Operational Risk

• No change has been made. The existing provisions for credit and operational risks are retained.

3. Monetary and Financial Stability Risk

• The buffer range has been adjusted from a fixed 4.5%-5.5% of the balance sheet to a broader range of 3.5%-6.5%, giving the Board flexibility to respond to changing macroeconomic conditions.

4. Contingent Risk Buffer

• This buffer includes provisions for monetary and financial stability, credit, and operational risks.
• The new range is 6.0% ± 1.5% of the balance sheet, compared to the current fixed level of 6.5% (with a minimum of 5.5%).

5. Flexibility in Market Risk Buffer

• The Board can now decide the level of resilience required based on a range defined by the Expected Shortfall (ES) at 99.5% and 97.5% confidence levels.
• If there’s a shortfall in revaluation reserves, corresponding provisions can be made.

6. Surplus Distribution Policy

• Any excess equity beyond 7.5% of the balance sheet size (after adjusting for shortfalls in risk buffers) can be moved from the Contingency Fund to the income account.
• No surplus will be transferred to the Government if equity falls below the required minimum level until it is restored.

When Will the New Framework Apply?

The revised Economic Capital Framework will be effective from the financial year 2024–25.

Why This Matters

This updated ECF aims to ensure that RBI maintains a strong financial position while adapting to new risks and macroeconomic developments. It also supports smoother and more predictable surplus transfers to the Government, contributing to better fiscal planning. By keeping flexibility at its core, the revised framework allows RBI to manage shocks more effectively while continuing to maintain its operational independence and stability.

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